Tax deferred investing allows you to grow your investments over time, while postponing paying taxes until the time of distribution. IRAs, annuities and retirement plans are all vehicles where you can accumulate wealth while deferring taxes.
An Individual Retirement Account (IRA) can be a simple way to invest for your retirement while receiving significant tax benefits. An alternative to the traditional IRA is the Roth IRA, which offers you a different type of tax benefit. Unlike with a traditional IRA, Roth IRA contributions are made on a post-tax basis, so there is not tax deduction. However, qualified distributions from a Roth IRA are tax free. This is an extremely attractive option if you expect to be in a higher tax bracket when you retire. There are certain requirements that you will need to meet for these types of investment. Consult your Financial Advisor for details or questions you might have with these investment vehicles.
An annuity is a contract between an insurance company and an individual that provides for periodic payments to the individual, or designated beneficiary, in return for an investment. If the payments are delayed until the future, then you have what is called a deferred annuity. If the payments on the annuity start immediately, then you have an immediate annuity. An immediate annuity is purchased for a lump sum of cash up front. A deferred annuity can either by paid in a lump sum up front payment or payments that are made over a number of years.
If you work for a company that offers a 401(k) plan, it is a good idea to take advantage of this plan and start contributing as early as possible. Contributions to a 401(k) are withdrawn directly from your paycheck on a pre-tax basis which makes saving extremely easy. The taxes on investment earnings are also deferred, so you do not have to pay taxes until you begin taking distribution. Many companies who offer 401(k) plans will also match a portion of their employees contributions.